Information asymmetry in reinsurance through various ceded contracts

By using unique individual-level data, this study investigates information asymmetry in reinsurance contracts ceded by commercial fire insurance contracts in Taiwan. The significantly negative conditional correlation between the ceded portion and claim probability in reinsurance contracts indicates no information asymmetry in the reinsurance market. However, when analyzing reinsurance through various ceding methods and ceding layers, there is evidence of information asymmetry in reinsurance contracts ceded through treaty agreements emerges when claims reach higher ceding layers. In lower ceding layers, the evidence of information asymmetry does not emerge, but the force of adverse selection and/or moral hazard are stronger in facultative reinsurance than in treaty reinsurance. When the ceding layer increases, this relative force alternates between treaty agreement and facultative agreement. These results indicate that information asymmetry effects exist but may be attenuated by various factors. For example, insurers may be strongly motivated to maintain long-term good relationships with reinsurers, and reinsurers may possess superior information that enables them to underwrite and audit effectively. Our findings also align with those in the literature, indicating that multilayer reinsurance treaties can mitigate information asymmetry.